News that Amazon.com Inc. is moving more strongly into delivering fresh produce, including meat, strawberries and milk, has the local competition worried.

“It’s going to be quite a challenge if they were to roll up and start expanding and getting into the Canadian marketplace,” said Grocery Gateway general manager Stephen Tallevi, one of the founders of the online grocery business in 1999.

Tallevi was reacting to news that Amazon.com, after several years of testing in hometown Seattle, is expanding fresh grocery delivery into Los Angeles and the San Francisco Bay area. If that goes well, it will expand into 20 other urban areas in 2014, including some outside the U.S., according to a report from Reuters, citing two unnamed sources.

Grocery Gateway has been growing the business every year since it was acquired by the family-owned Longo’s in 2004, said Tallevi. But a competitor like Amazon is to be taken seriously.

“They certainly have the dollars to experiment with different models that could be cost-prohibitive for a smaller company. They could be very happy with a break-even proposition knowing they are building a direct link into a consumer’s home,” said Tallevi.

The grocery market in Canada is already fiercely competitive, with discount retailers Walmart and the newly arrived Target competing with established grocers like Loblaws, Sobeys and Metro.

Wal-Mart in the U.S. is also testing same-day and next-day delivery of online grocery and general merchandise orders in the San Francisco Bay Area and operates a successful grocery delivery business in Britain.

“We are ready and able to expand grocery delivery in the U.S. as the market demands,” Wal-Mart spokesman Dan Toporek said.

While the online grocery market in Canada is almost too small to measure, online grocery shopping accounts for 3.5 per cent of the grocery market in the U.K., where densely populated cities, high gas prices and toll roads make grocery delivery services popular, said Rob Gerlsbeck, editor of Canadian Grocer.

“If you want to be a grocery retailer in the U.K., you have to be selling online at this point,” he said.

A service called “click-and-collect” is gaining traction in the U.K. and France. Consumers order online and swing by the store for pickup. Some locations feature a drive-through pickup service.

Tallevi says there has been talk lately of a tipping point in the industry in Canada. Ordering groceries online seemed odd in 1999. Shoppers today are comfortable ordering from home computers or their mobile phones.

Tallevi hopes that consumers in the GTA will choose Grocery Gateway because of its association with Longo’s, which has built a brand on fresh meat and produce.

“We have a brand that resonates with consumers,” said Tallevi.

Groceries have proven to be one of the most difficult sectors for online retailers to crack. One of the most richly funded start-ups of the dot-com era, Webvan, was a spectacular failure as the cost of developing the warehouse and delivery infrastructure proved overwhelming.

Roger Davidson, a former grocery executive at Wal-Mart, Whole Foods and Supervalu, said Amazon will struggle to make money from AmazonFresh because fresh produce can easily go bad in storage warehouses and get damaged during delivery.

“Will it work? I would bet against it,” Davidson said. “The reasons these businesses have failed in the past have not gone away.”

Amazon is searching for new, large markets to enter as the company tries to maintain a growth rate that has fuelled a 220 per cent surge in its shares over the past five years. The grocery business in the U.S., which generated $568 billion in retail sales last year, makes an attractive target.

A successful foray into groceries could also help develop a broad-based delivery service employing Amazon trucks to deliver directly to homes, which could have implications for UPS, FedEx and other package delivery companies that currently ship Amazon goods.

Other competitors in the online grocery market in the U.S. include FreshDirect, which delivers food to homes and offices in some parts of New York City and Peapod, owned by international food giant Royal Ahold NV, which calls itself the largest Internet grocer in the U.S., delivering more than 23 million orders across 24 markets.

It is not clear whether AmazonFresh in Seattle is profitable because Amazon does not disclose results from the business.

Amazon chief executive officer Jeff Bezos was asked about the business during the company’s annual shareholder meeting last month. He said that the team had “made progress on the economics over the last year.”

With files from Reuters

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